Insurance is something we buy but hope we never need. Insurance companies sell policies for individuals, families and businesses to provide financial protection in case of a claim or loss.


The function of an insurance company is to help assess your risks and provide you with the right coverage to compensate you for any loss.

How Insurance Works

Simply stated, insurance is an agreement to share risks. Think of it as putting all your eggs in one basket and potentially losing them all or, instead, dividing your eggs among several baskets to minimize a loss.

When you buy an insurance policy from an insurance company, you're sharing risks with all the other policyholders. The money collected from all the clients goes into a pool to pay for the claims made by a few.

How Risks Are Assessed

When clients purchase insurance, they are put in a pool of other clients who share similar risks. Actuaries, business professionals whose job it is to analyze the financial consequences of risk, use mathematical formulas and sequences called algorithms to calculate risk.

Costs of insurance premiums are based on risk. For example, a construction company pays more for liability insurance than does a flower shop. There is much greater potential for injury on a construction site than in a small storefront business.

Types of Insurance

There are many types of insurance. Get information from business experts at the Small Business Administration (SBA) or the local office of the Small Business Development Center (SBDC). If possible, talk with owners of businesses similar to yours and then meet with an insurance agent about your business needs.

Types of insurance policies purchased by businesses include the following:

  • Professional liability insurance: Also known as errors and omissions (E&O) insurance. It protects you against negligence claims arising from harm that results from mistakes or failure to perform.

  • Property insurance: Necessary whether you rent or own the property. Property insurance typically covers equipment, signage, inventory and furniture in the event of storm, theft or fire. Mass destruction events, such as tornadoes, floods and earthquakes, are not usually covered under a general policy. You may need to get a separate policy if these are likely in your area.

  • Workers' compensation insurance: Should be added with the hiring of your first employee to cover medical expenses as well as disability and death benefits. Even if employees perform low-risk work, such as in an office, claims could result from slip-and-fall injuries or repetitive motion injuries such as carpal tunnel syndrome.

  • Home-based businesses: Not typically covered by homeowners insurance policies.

  • Product liability insurance: For potential claims of damage or harm that result from a product. Coverage can be tailored to specific types of products, such as toys or machinery.

  • Vehicle insurance: Necessary if using company-owned vehicles. If you or employees use personal vehicles for business, personal insurance provides coverage in case of an accident.

  • Business interruption insurance: Covers your business in the event you have to limit or shut down because of disaster or catastrophic event. The insurance compensates a business for financial losses.

Cost of Business Insurance

The cost of business insurance depends on a number of factors, including the kinds of coverage and policies you need. Consider additional factors, such as:

  • The size of your business
  • Geographic location
  • Risks associated with your business or profession
  • Policy limits (the highest amount the insurance company pays for a claim)